Bowleven buy ahead of the shareholder action (LSE:BLVN)

27 Jan 2017

Bowleven (LSE:BLVN), the Cameroon focussed oil & gas company, announced this week that it’s largest shareholder, Crown Ocean, has requisitioned an EGM to seek removal of the board to be replaced by restructuring experts. After years of stagnancy, the company’s share price has responded well to this news and the feeling in the City is that the rebels will win the day. If they do, could the market finally recognise the apparent value in Bowleven which has been priced out of this stock for so long?

Just mention Bowleven to most oil & gas investors on AIM and they sigh, roll their eyes and say, “no thank you very much”. CEO and bean counter extraordinaire Kevin Hart has done a miserable job of running this company. Under Hart, Bowleven’s share price tanked from the high of 382p in March 2011.

Not even a $250million farm-out of the company’s Etinde gas project in Cameroon could do anything to lift the stock. Pretty much as soon as the Etinde deal was announced the market discounted the company’s market cap to below the value of cash on its balance sheet. Given that Bowleven is debt free this has been a damning indictment of the board.

Over the two years since and Bowleven has traded at a significant discount to its enterprise value. What is even worse is that the market has been proven categorically right in its pessimistic outlook of the company under the current directors.

After years of terrible performance, broken promises and poor delivery the market’s negative passion was totally correct. The current board simply does not have what it takes to do something positive with this company. Since completion of the Etinde farm-out, these directors have wasted $80,000,000 on failed exploration, failed attempts to acquire other assets, administrative expenses and, of course, wildly extravagant boardroom remuneration. The running of this company has been a complete shambles and it’s shareholders who have paid the price for this.

It is no surprise that Bowleven’s share price has ground lower, in the face of such wanton value destruction.

Crown Ocean started buying Bowleven stock when it traded at nearly a 30% discount to the company’s cash balance. Crown Ocean bought its stock in the secondary market. When it issued the first TR1 this raised a few eyebrows. Couldn’t these boys see that Bowleven was one of the worst value traps on British markets?!

Over the coming months Crown Ocean’s longer term plan became clear, as it built its stake to 13.11% in the company. By buying its stock in the market Crown Ocean obviously wasn’t going to support the hapless Hart and a palace coup seemed the inevitable outcome.

As appealing a target as Bowleven’s cash balance was (and is), this cannot have been the only motivator for Crown Ocean buying into Bowleven. It carried on buying stock up to about 24p (which is a best guess based on TR1 releases). With Bowleven squandering $750,000 a month on administrative costs and director pay this meant the gap between what Crown Ocean was paying and the value of Bowleven’s cash was narrowing. Let’s assume Crown Ocean acquired its stake at a 20% discount to cash (which is almost certainly a very generous estimate) this does not offer a good enough risk/reward profile to make this a gamble worth taking. This is especially the case when you consider all the effort Crown Ocean would have to go to in leading a popular revolt.

Since there is zero chance of Bowleven’s board delivering shareholder value, the only remaining explanation is that Crown Ocean believes there is significant locked up value in Etinde that the market has been wrong to mark down to zero.

Under Hart’s poor leadership perhaps the market is right. It would only be a matter of time before this guy blew Bowleven’s remaining $100,000,000, leaving the company exposed to a low-ball bid for its 20% stake in Etinde.

However, under new leadership this could all change. In nominating two restructuring experts for shareholder approval to join the board, Crown Ocean has made clear it believes Bowleven can be reformed into a leaner, fit for purpose holding company. Crown Ocean has also suggested a significant distribution of cash to the company’s shareholders.

This all sounds like a great idea. Slashing costs and giving cash back to shareholders has to be the way forward for Bowleven. Forget this fantasy of building a pan-African oil & gas company. The market isn’t right for that. Bowleven’s board has burned $80,000,000 proving this.

If the coup is successful and Kevin Hart is given his P45, this could be the spark rekindles the market’s belief in the value of Etinde. What happens then?

The share price could easily move higher by 15p or more.

So far we’ve already seen a 3p advance (12.5%) and the fireworks haven’t even started yet.

Over the coming weeks the battle for the future of Bowleven is almost certainly going to intensify. The market has no trust in the current board to deliver, so if it starts to look like Hart and his cronies are going to get kicked out, expect to see the share price head towards 30p. Of course, if Hart and his gang do then walk the plank we could easily see 40p plus in a short period of time.

At 27.25p perhaps the risk reward isn’t quite there, but if there is a dip below 25p in the coming days this could present a buying opportunity with at least 60% upside. The catalyst for this will be executive heads rolling.

The S&P500 has reached new highs again. It’s likely to run on to tackle the 3000 milestone level shortly, where the chart suggests strong headwinds lie. But during the past decade bull run, (assuming we’re still in one) investors have seen this scenario play out positively before - where a big move upward followed with gusto, despite seeming unlikely. Will the third time be so lucky?

Crowd Equity for Placings, IPOs and Live Market Blockbuilds, designed to give provate investors access to placements and Intial Public Offerings (IPOs), predominantly on the London Stock Exchange’s Alternative Investment Market (AIM).

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